Can US drill its way to low gasoline prices?

Former Shell Oil CEO John Hofmeister's prediction a fortnight ago that retail gasoline prices would hit $5 per gallon by 2015 has gone viral since then, drawing attention largely on the U.S. drilling policies but also spooking consumers and polarizing analysts in the process.

The average price at the pump in the U.S. rose to $3.07 a gallon on Monday, up from $3.04 a gallon a week ago, and $2.92 a gallon a month ago, Market Watch reported, citing the AAA Daily Fuel Gauge Report.

At this time in 2010, retail gasoline prices averaged $2.66 a gallon. The highest price of all time of $4.11 a gallon was recorded on July 17, 2008, when oil futures traded well over $100 a barrel. Oil futures are trading at about $92 a barrel on Monday.

As of the last trading day of 2010 the light, crude prices had risen as much as 15 percent above prices on the corresponding day of the previous year. Analysts broadly attributed the considerable rise to factors like improved macro economic outlook globally, the fall in the value of the U.S. dollar and strong inventory figures. However, conservative think tanks in the U.S. maintained that Obama administration's drilling policies have led to a spike in prices.

They argue that Obama administration's actions like cancelling permits in states like Utah and Montana, delaying of offshore leasing, imposition of moratorium on offshore oil and gas drilling and the call for higher taxes on oil company profits have all fuelled the gasoline price boom.

CALLS FOR MORE DRILLING

As gasoline prices are rising in the U.S. there are increasing calls for expediting drilling. However, it has been pointed out that U.S. oil drilling was going at a 23-year high during the last year. Starr Spencer, writing in Platts, said US oil drilling returned to late 1987 levels in 2010. Citing the Baker Hughes rig count, he wrote that in the last week of the year the US oil-directed rig count rose to 771 rigs, which surpassed the all-time high over the last 23 years.

There are many who argue that frenzied drilling aimed at holding gas prices back is not the right thing to do and that these will only help Big Oil to fatten their bottom lines. Not surprisingly, we are hearing this from incoming Republicans who will now be running the U.S. House of Representatives. They are eager to find any excuse to support the agenda of the oil industry, which is to have increased access to land for drilling purposes and to preserve lucrative tax breaks and subsidies, says Tyson Slocum, Director of Public Citizen’s Energy Program.

We cannot drill our way to low prices. And as we have seen with past price spikes, the industry’s tax breaks serve only to pad their profits, not keep prices down. In the name of deficit reduction, Congress is about to consider cutting services that provide benefits to tens of millions of Americans. There is no excuse for even considering cuts to vital services to poor and working Americans while the oil industry continues to claim more than $5 billion a year in tax breaks, he says.

OIL COMPANY PROFITS

Interestingly, 2010 was a very good year for oil companies as higher prices fattened their profits. Excluding BP PLC, the four major investor-owned oil companies -- Exxon Mobil, Royal Dutch Shell, Chevron Corp. and Total SA -- raked in a combined profit of $59.7 billion during the first nine months of the last year while BP, which was hit by the spill disaster, was the only exception.

DITHERING ON SPILL BILL

Slocum says market speculation has played a role in rising gas prices and points out that government has not made much progress in regulating the markets. He also says oil company profits should be taxed higher so that more funds can be channeled into research on alternative energy sources.

Despite the BP disaster, Congress still hasn’t passed a spill bill that would require offshore drilling to be safer for the environment, protect workers or ensure that oil companies - not the American taxpayer - are financially responsible for oil spills. Lawmakers should be focusing on that instead of throwing more bones to the industry, he says.

As prices rise, lawmakers also should consider a windfall profits tax. The money should be used to pay for clean energy, energy efficiency and mass transit. If we invested adequately in such alternative energy sources, we wouldn’t have to hear that familiar refrain when oil prices go up.

IS OPEC SPARE CAPACITY ENOUGH TO SOAK UP HIGHER DEMAND?

The Organization of Petroleum Exporting Countries (OPEC) too has steadily argued that market speculation, not supply constraints, has been behind the rise of crude prices. OPEC boasts of a spare capacity of more than 5 million barrels per day and says its production policies are not behind the price rally.

However, oil analysts have calculated that much of that spare capacity can be gobbled up by the gargantuan oil consumption by China and other emerging economies in the years ahead. For example, China's oil consumption is poised to rise 5 percent in 2011.

It's also pointed out that Middle Eastern oil producers are not making significant investment in exploration and production as they are sitting on spare capacities.

REGULATORY CHANGES

Meanwhile, Platts analysts have said the U.S. regulatory framework overseeing energy sector investments could undergo fast-paced changes in 2011.

While it’s believed that Congress may do little or nothing in 2011 to address major energy challenges facing the United States, federal regulators will be busy considering significant changes in the way investments are made in oil, natural gas, electric-power and other energy industries, Platts said in a statement.

However, a senior Platts executive has said the chances of the U.S. Congress enacting legislation to address the BP offshore drilling disaster in the Gulf of Mexico are thinning. Brian Hansen, managing editor of Platts Inside Energy, said the Congress was less likely to enact a bill as the balance of power has tilted in favor of the Republicans.

Hansen said Republicans had objected to a bill passed by the then Democrat-led House in 2010 that would have raised a $75 million limit on company liability for damages caused by oil spills.